Markets Live chat transcript for the chat ending at 11:15 on 25 Jun 2010. Participants in this chat were: Bryce Elder Izabella Kaminska, FT
BE
Good morning.
BE
And welcome, as ever, to Markets Live.
BE
FT Alphaville’s daily wander around the markets.
BE
Neil’s off to a stag weekend on the Isle of Man
BE
Or Geurnsey, or something.
BE
Which is fancy dress, apparently.
BE
(Costume suggestions welcome)
BE
So, joining me today is Izabella
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Who’s currently fighting with Neil’s computer.
BE
Are you here yet, Iz?
IK
yes,
IK
I should have known better and come a little earlier
BE
So we should cut to the chase I think.
BE
And take a look at the Eternally Falling Knife.
11:07AM
BE
So.
BP Plc (BP.:LSE): Last: 302.83, down 22.42 (-6.89%), High: 324.80, Low: 300.75, Volume: 48.71m
BE
That’s delayed.
BE
We are, in fact, through 300p.
IK
I found an icon we can use
BE
Go on.
BE
Very nice.
BE
Though 
works.
works.BE
Absolutely everyone has those.
BE
So what’s the trigger to this latest rout, Iz?
IK
Right, apparently there’s a bit of a rumour doing the rounds
IK
that BP may be seeking bankruptcy protection
BE
This is, we emphasise, plutonium-grade raw.
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
BE
And, as usual, it seems to be the CDS market driving the equity market driving the CDS market driving the ….
BE
What did JP Morgan call this? The vortex of doom, or something?
IK
yeah, neil did a post
IK
Current CDS is apparently 580 (+44), according to Markitt
BE
(Squarepeg: it’s been surfacing and resurfacing for weeks, like a burnt turtle.)
BE
And there are, it appears, a couple of actual facts to cling on to here.
BE
For example, this chap appeared on Fox News.
BE
“Bankruptcy absolutely is an option, and the U.S. needs to recognize that,” said Peter Kaufman, president and head of restructuring and distressed M&A at the Gordian Group, an investment bank in New York.
BE
That was, I emphasise once more, Fox News.
IK
Fox “BP burns turtles alive” News
BE
That’s the one.
BE
And, more interestingly ….
IK
(@taxloss – I’m working on it)
BE
There’s a Nomura note in circulation
BE
Talking about a BP bailout by a sovereign wealth fund.
BE
It’s a good, meaty bit of work this, so pay attention at the back please.
BE
Equity-linked financing could offer a route through the maelstrom
BE
A heavy inversion of both credit yield and equity volatility suggests the market is concerned
about a near-term credit event around BP. Creating a scenario that puts near-term liquidity
(of US$11bn-plus) at risk looks remote, however we recognise that with an uncapped well,
hurricane season and continued media focus the market will struggle to get much comfort.
In a confidence-hit market ‘crazy’ solutions – such as those that involve nuclear bombs – get
airtime, while pragmatic attempts to quantify liabilities – such as our US$12bn NPV
assessment – fall on deaf ears.
about a near-term credit event around BP. Creating a scenario that puts near-term liquidity
(of US$11bn-plus) at risk looks remote, however we recognise that with an uncapped well,
hurricane season and continued media focus the market will struggle to get much comfort.
In a confidence-hit market ‘crazy’ solutions – such as those that involve nuclear bombs – get
airtime, while pragmatic attempts to quantify liabilities – such as our US$12bn NPV
assessment – fall on deaf ears.
BE
We think this perception of near-term credit risk is highly damaging for BP. Current liquidity
amounts to some US$15bn – some US$5bn in cash, US$5bn in stand-by facilities (with no
material adverse change clauses or financial covenants) and US$5.25bn of bilateral
committed facilities arranged in late May. That liquidity position looks adequate to deal
with committed acquisitions (US$ 7.5bn), spill clean-up costs (we estimate US$5bn) and
the phased funding of the escrow. But a sharp rise in liabilities or alternatively a collapse in
oil prices could leave the funding much tighter. Consider too that BP has an estimated
US$2.0bn-2.5bn of one-year commercial paper to roll over, needed to fund day-to-day
trading activities and working capital, which will likely be much harder (and more
expensive) to do in this environment.
amounts to some US$15bn – some US$5bn in cash, US$5bn in stand-by facilities (with no
material adverse change clauses or financial covenants) and US$5.25bn of bilateral
committed facilities arranged in late May. That liquidity position looks adequate to deal
with committed acquisitions (US$ 7.5bn), spill clean-up costs (we estimate US$5bn) and
the phased funding of the escrow. But a sharp rise in liabilities or alternatively a collapse in
oil prices could leave the funding much tighter. Consider too that BP has an estimated
US$2.0bn-2.5bn of one-year commercial paper to roll over, needed to fund day-to-day
trading activities and working capital, which will likely be much harder (and more
expensive) to do in this environment.
BE
Pressure is growing on BP to improve its liquidity position; assuring sufficient funding to cap
the well and meet ‘fat-tail’ scenarios around near-term expenses. With debt expensive and
asset sales taking time, we consider that equity-linked financing – perhaps backed by
Sovereign Wealth as a show of support – could prove the attractive short-term solution.
the well and meet ‘fat-tail’ scenarios around near-term expenses. With debt expensive and
asset sales taking time, we consider that equity-linked financing – perhaps backed by
Sovereign Wealth as a show of support – could prove the attractive short-term solution.
BE
Under this scenario, we think the uplift for shareholder value would be significant, in much
the same way that a similar transaction worked to secure the credit and equity position of
Barclays Bank in 2008. With liquidity concerns removed, we estimate a fair value for BP
of 465p/share on a going-concern basis (Figure 2) – ie, BP as-is, but funded – but
including long-term reputational damage.
the same way that a similar transaction worked to secure the credit and equity position of
Barclays Bank in 2008. With liquidity concerns removed, we estimate a fair value for BP
of 465p/share on a going-concern basis (Figure 2) – ie, BP as-is, but funded – but
including long-term reputational damage.
BE
However, one of the attractive propositions for
equity or equity-linked investors is also that reputational damage may get arbitraged by the
M&A market over time. In that regard, we think the full current market value of BP’s business
is around 550p/share.
equity or equity-linked investors is also that reputational damage may get arbitraged by the
M&A market over time. In that regard, we think the full current market value of BP’s business
is around 550p/share.
IK
And yet we’re trading around 300
BE
Yes
IK
which as Joseph noted earlier, is a 1996 level
IK
That’s before BP picked up Amoco, and just after Browne came in with his mega acquisition strategy
BE
Yup. We’re now pricing BP as British Petroleum.
BE
(Ignoring the shares in issue figure, obviously, as that ruins a good story.)
IK
I remember when they insisted on calling it BP Amoco
IK
didn’t last
IK
anyway it’s the acquistions that have half caused the problem
IK
There was always the understanding that the integration never really worked out properly
IK
and many of the safety issues originated from that
IK
anyway i have a confession to make
IK
I used to work for the falling knife
IK
BE
(Outlaw: CEOs have relatively small windows in which to trade stock. You’re making a rather extreme claim if you suggest that correlation implies causation.)
BE
So anyway, should we go through the arguments again about whether BP could actually file for Ch.11?
BE
Or is everyone bored of those?
IK
partially bored
IK
But since Jamie Chisholm on markets was screaming aggressively about it just a few minutes ago.. perhaps it’s topic in demand?
IK
Quite controversial obviously
IK
and as noted before, is it constitutionally possible?
IK
what do you think bryce?
BE
Well, solvent companies CAN file in the US.
BE
And, faced with an unlimited liability, it’s plausible.
BE
But
BE
If the US courts thought BP did not have fair grounds to seek protection they’d kick it out with a size 12.
BE
There’s a good Bloomberg piece summing up the pros and cons here.
IK
Anyway the clean-up and containment costs are ramping up
IK
BP RNS this morning puts it at $2.35bn so far
BE
Yup – which is 5-10% of the average sellside cost forecast.
BE
Though the “liability” number in that’s all over the place.
BE
Right – I’m bored with BP now.
IK
where to?
BE
Let’s turn to the wider market.
11:27AM
BE
And ………….
BE
We’re down.
BE
FTSE’s off about 40 points.
BE
After rotten numbers all over the place in the US.
BE
Nike, Oracle, Bed Bath and Beyond, etc.
IK
Oh uh
IK
maybe they should consider dropping the beyond?
BE
Yes. It takes up a lot of floorspace.
IK
The word is now slurred
BE
Hm.
BE
So we went risk-off on Asia.
BE
And now we’ve got a death cross on the Footsie.
BE
For non-chartists and non-astrologers, that’s when the 50-day MA crosses below the 200
BE
And the moon rises in Jupiter, and the cock crows three times before sunrise.
BE
Last time it happened was December 07
BE
And we ended 45 per cent lower by March 09.
IK
Bryce, are those tea leaves in your cup?
BE
I’m sacrificing a chicken this lunchtime to read its entrails.
IK
Very Roman
BE
Or perhaps a sea turtle.
IK
But seriously, people do believe in these levels
BE
Hell of a job to sacrifice one of those though. Tough, crispy shell.
11:33AM
IK
So what about the falling knives of yore sector?
BE
I assume yourt mean the banks
IK
BE
Domestics are small down.
Barclays PLC (BARC:LSE): Last: 283.74, down 3.26 (-1.14%), High: 293.00, Low: 280.00, Volume: 19.12m
Lloyds Banking Group plc (LLOY:LSE): Last: 55.36, down 0.95 (-1.69%), High: 56.85, Low: 54.45, Volume: 142.90m
Royal Bank of Scotland Group PLC (RBS:LSE): Last: 45.29, up 0.1 (+0.22%), High: 46.80, Low: 45.00, Volume: 35.29m
BE
(ROTR: please don’t get pedantic about chartism. Unless the subtext wasn’t clear above, I don’t overly care.)
BE
So I was expecting the reaction to this Basel story to be a bit more positive.
BE
For anyone who missed it.
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Banks win battle for limits to Basel III
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Plans by global regulators to compel banks to set aside billions of dollars in extra capital to cope with future crises are to be pared back after intense lobbying by the industry.
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After wrangling over the details of a regulatory overhaul published six months ago, a consensus on the Basel committee is suggesting that its proposals be thinned down.
BE
A draft of the latest thinking of the committee, set up to oversee global financial regulation, is to be presented at this weekend’s G20 summit in Toronto.
BE
The most significant change to the proposed reforms concerns the committee’s recommendations on the volume of liquid funds that banks should hold to protect them against another financial crisis.
BE
So the NSFR will be shelved.
IK
Good news!
IK
So why are the banks off?
BE
Um …. Greek CDS? It’s our usual excuse.
BE
Anyway, here’s Jason Napier at Deutsche with a response.
BE
The Financial Times reports today that the BIS is to tell the G20 this weekend
it is dropping proposals for the Net Stable Funding Ratio (NSFR), and
that pension deficit deductions and the treatment of minority capital may be
left to national regulator discretion. In our previous research we estimated
that European banks would have to raise an additional E2.1tn in term funding,
in addition to the E2.1tn they have to roll anyway, making the NSFR
unworkable in practice. If true, we see this as positive for the UK banks,
whose use of wholesale funding is higher than the peer group. Top pick is
LBG (Buy, TP 90p, trading on 4.7x 2012 EPS).
it is dropping proposals for the Net Stable Funding Ratio (NSFR), and
that pension deficit deductions and the treatment of minority capital may be
left to national regulator discretion. In our previous research we estimated
that European banks would have to raise an additional E2.1tn in term funding,
in addition to the E2.1tn they have to roll anyway, making the NSFR
unworkable in practice. If true, we see this as positive for the UK banks,
whose use of wholesale funding is higher than the peer group. Top pick is
LBG (Buy, TP 90p, trading on 4.7x 2012 EPS).
BE
BoE Financial Stability Report reminds investors: 2011 is the hump year
The BoE’s FSR out today highlights the large funding requirement of the UK
banks for next year. Ironically, a key component of this higher refi requirement
is to repay the BoE’s ~£120bn Special Liquidity Scheme, which the
BoE has been refusing to extend. It is also striking that the report appears
to be calling for banks to lend more at the same time as saying that volatility
in funding markets YTD has kept banks from raising sufficient finance.
The BoE’s FSR out today highlights the large funding requirement of the UK
banks for next year. Ironically, a key component of this higher refi requirement
is to repay the BoE’s ~£120bn Special Liquidity Scheme, which the
BoE has been refusing to extend. It is also striking that the report appears
to be calling for banks to lend more at the same time as saying that volatility
in funding markets YTD has kept banks from raising sufficient finance.
BE
We think SLS or CGT extension may be required
We believe banks will retain profits, limit lending, and raise as much funding
(especially covered bonds and RMBS) as possible, but that further government
or BoE assistance will be required in 2011 (perhaps in the form of an
extended Credit Guarantee Scheme) in order to assure comfortable refinancing
of upcoming committments.
We believe banks will retain profits, limit lending, and raise as much funding
(especially covered bonds and RMBS) as possible, but that further government
or BoE assistance will be required in 2011 (perhaps in the form of an
extended Credit Guarantee Scheme) in order to assure comfortable refinancing
of upcoming committments.
BE
And, as Bundesbank so dilligently highlights, the Asian banks are doing okay this morning.
HSBC Holdings PLC (HSBA:LSE): Last: 644.50, up 7.4 (+1.16%), High: 651.70, Low: 640.50, Volume: 8.44m
Standard Chartered PLC (STAN:LSE): Last: 1,745, up 34 (+1.99%), High: 1,766, Low: 1,711, Volume: 2.82m
BE
Switch, obviously.
BE
Though Stan’s also getting a bit of support from a push by CLSA
BE
Whose analyst, Daniel Tabbush, is quite well followed.
BE
The UK bank levy will cost HSBC around $300-500m per year starting
next year or 3% of profit. There are no other banks in Asia where this will
be relevant on the same scale. At the same time, HSBC will have to
contend with slow growth in its major geographies US, UK, France, where
it has 70% of its loans. By contrast Asia’s banks are seeing lending
accelerate, provisions contracting, margins widening and fees improving.
New BIS II guidelines will negatively impact HSBC and not most Asian
banks, especially those in high growth economies and Hong Kong. We
maintain our U-PF on HSBC, BUY on STAN, and OWT on Asian banks.
next year or 3% of profit. There are no other banks in Asia where this will
be relevant on the same scale. At the same time, HSBC will have to
contend with slow growth in its major geographies US, UK, France, where
it has 70% of its loans. By contrast Asia’s banks are seeing lending
accelerate, provisions contracting, margins widening and fees improving.
New BIS II guidelines will negatively impact HSBC and not most Asian
banks, especially those in high growth economies and Hong Kong. We
maintain our U-PF on HSBC, BUY on STAN, and OWT on Asian banks.
BE
Regulatory risks to HSBC
The UK bank levy will reduce HSBC income by about $400m per year
There are changes to US credit card laws which will lower income by $300m
It is unclear how the Volcker rule will affect HSBC USA, but unlikely to be zero
New BIS II guidelines will require a capital surcharge for big banks like HSBC
At 10% Tier I requirements and 2% surcharge, then HSBC would need $12bn
The UK bank levy will reduce HSBC income by about $400m per year
There are changes to US credit card laws which will lower income by $300m
It is unclear how the Volcker rule will affect HSBC USA, but unlikely to be zero
New BIS II guidelines will require a capital surcharge for big banks like HSBC
At 10% Tier I requirements and 2% surcharge, then HSBC would need $12bn
BE
Stanchart is Asia, Africa, Middle East
Where little of STAN is in UK or US, there is less regulatory risk vs HSBC
This regional focus also means it benefits from higher returns, higher income
82% of STAN’s loans are Asia, Mid East, Africa vs 20% (with LatAm) for HSBC
ROAs are therefore grossly different: 1.2% (11CL) for STAN and 0.7% for HSBC
Asian banks are highly liquid, well capitalised, so generally less regulatory risk
Where little of STAN is in UK or US, there is less regulatory risk vs HSBC
This regional focus also means it benefits from higher returns, higher income
82% of STAN’s loans are Asia, Mid East, Africa vs 20% (with LatAm) for HSBC
ROAs are therefore grossly different: 1.2% (11CL) for STAN and 0.7% for HSBC
Asian banks are highly liquid, well capitalised, so generally less regulatory risk
11:41AM
BE
Breaking news from knifewatch
IK
RTRS-BP SAYS FINANCIALLY STRONG, HAS FUNDS TO MEET OIL SPILL COSTS, NO PLAN TO FILE FOR BANKRUPTCY
IK
It’s all ok. The turtles will be ok.
BE
No plan whatsoever? It hasn’t been considered? Even blue-sky?
BE
(Or black sea)
BE
Hm.
BE
BP shares still down 21p, or 6.8%
BE
Very small rally.
11:43AM
IK
Their communications department has been compromised I think
BE
Perhaps. Pants-on-fire syndrome.
IK
It kind of reminds me of Bear Stearns
IK
only in the communications sense
IK
CEO kept going on TV and saying stuff nobody believed
BE
Yes. There are undoubtedly echoes.
BE
And we’re seeing ye more support for the divi yielders this morning, which you can’t really untie from BP’s problems.
Vodafone Group Plc (VOD:LSE): Last: 145.20, up 2.3 (+1.61%), High: 145.35, Low: 143.55, Volume: 47.99m
BE
For example.
BE
Actually, here’s Collins Stewart on Vod
BE
Not only does it mention BP, it also waffles on about the Iphone
BE
Which should liven up the comments a bit.
BE
Data pricing and Ofcom paper prompt upgrade to trading BUY
Two more key bits of news on data pricing and net neutrality add weight to a
more stable near term perspective for Vodafone. We remain fearful of the
major structural issues facing pure play mobile operators in the mid to long
term. But we believe several factors may outweigh these big picture
concerns in the near term. The importance of dividends in a world of BP and
bank disasters, US dividend possibilities, iPhone, and general smartphone
sales booms and a generic trend for telco outperformance in H2 all add
weight to more positive near term sentiment. A trading buy then…for now.
Two more key bits of news on data pricing and net neutrality add weight to a
more stable near term perspective for Vodafone. We remain fearful of the
major structural issues facing pure play mobile operators in the mid to long
term. But we believe several factors may outweigh these big picture
concerns in the near term. The importance of dividends in a world of BP and
bank disasters, US dividend possibilities, iPhone, and general smartphone
sales booms and a generic trend for telco outperformance in H2 all add
weight to more positive near term sentiment. A trading buy then…for now.
BE
Three iPhone 4 pricing signals data pricing floor
Yesterday afternoon Three came out with its pricing plans for iPhone 4. As
expected the prices offer the best value for UK consumers, being up to £70
cheaper in upfront cost, and offering double the minutes, free “3”to“3”
minutes and 5,000 texts; BUT, moving from unlimited data to 1GB capped
plans. The price may equate to only 0.5p per MB, and signal a further 80%
price reduction potential for Vodafone’s European mobile data prices, but it
signals a floor in data pricing and the end of unlimited data plans.
The industry is now taking control. Price rises will be required to make the alldata
future profitable, but there is reduced potential for disruption from here.
Yesterday afternoon Three came out with its pricing plans for iPhone 4. As
expected the prices offer the best value for UK consumers, being up to £70
cheaper in upfront cost, and offering double the minutes, free “3”to“3”
minutes and 5,000 texts; BUT, moving from unlimited data to 1GB capped
plans. The price may equate to only 0.5p per MB, and signal a further 80%
price reduction potential for Vodafone’s European mobile data prices, but it
signals a floor in data pricing and the end of unlimited data plans.
The industry is now taking control. Price rises will be required to make the alldata
future profitable, but there is reduced potential for disruption from here.
BE
Net neutrality opening gambit, nowhere near as bad as feared
Ofcom published a discussion paper yesterday afternoon to open the debate
on net neutrality in the UK. Of itself, this should be a negative, highlighting
that ISPs should not be able to discriminate against providers of over-the-top
competing services (e.g. Skype). Yet we believe Ofcom’s opening position is
not strong enough to move the industry quickly to where it will inevitably end
up. In particular, Ofcom believes there is insufficient evidence at present to
justify restrictions on traffic management and existing competition tools and
consumer transparency options will be used before considering any
minimum quality of service requirements, including no prevention of twosided
markets. This is of near term relief to all ISPs, especially mobile.
Ofcom published a discussion paper yesterday afternoon to open the debate
on net neutrality in the UK. Of itself, this should be a negative, highlighting
that ISPs should not be able to discriminate against providers of over-the-top
competing services (e.g. Skype). Yet we believe Ofcom’s opening position is
not strong enough to move the industry quickly to where it will inevitably end
up. In particular, Ofcom believes there is insufficient evidence at present to
justify restrictions on traffic management and existing competition tools and
consumer transparency options will be used before considering any
minimum quality of service requirements, including no prevention of twosided
markets. This is of near term relief to all ISPs, especially mobile.
BE
Sentiment could stoke shares to c160p, our new interim target
11:50AM
IK
@Driss – last time i saw him he was raising capital for his new hedge fund
IK
but then the financial crisis struck
BE
Wasn’t one of the bookies running a book on Browne getting reappointed?
IK
really?
BE
An outside bet, obviously.
BE
Tony Blair was on shorter odds.
IK
Yeah, i see the liklihood of Anji Hunter getting appointed as more likely
BE
Well, quite.
11:52AM
BE
Ok – before we continue, Lorcan has reminded me of a service announcement.
BE
Dublin AV drinks tonight from 6pm
BE
At “legendary Dublin traditional bar” Doheny & Nesbitts
IK
@Bundesbank – yes
BE
We can’t attend, sadly, but hope to see pictures on Monday.
IK
(I used to bump into him in the lift sometimes, lord browne that is, and he was always very nice and charming and had loads of charisma)
BE
I got chatting to a BP exec in a restaurant once
BE
Who worked very closely with Browne
IK
(Meanwhile i woudln’t even notice Tony Hayward, he kind of merges into the background. Sounds a bit like marvin from hitch hiker’s galaxy too)
BE
He was very very drunk
IK
and?
BE
And full of spectacularly libelous stories, none of which I’m repeating.
BE
So, in the meantime
BE
Let’s take a quick look at the miners shall we?
BE
They’re down again
IK
ah.. aussie gate
BE
Yeah – Gillard has done nothing but raise the uncertainty levels
BHP Billiton PLC (BLT:LSE): Last: 1,892, down 28 (-1.46%), High: 1,926, Low: 1,868, Volume: 2.14m
Rio Tinto PLC (RIO:LSE): Last: 3,225, down 57.5 (-1.75%), High: 3,312, Low: 3,171, Volume: 2.19m
Xstrata Plc (XTA:LSE): Last: 963.90, down 21.4 (-2.17%), High: 1,001, Low: 955.10, Volume: 5.24m
BE
Though for the latter one, there’s also a hefty downgrade from BarCap in circulation
BE
Chris LaFemina cuts earnings by 21% for 2010, 10% for 2011, and 9% for 2012
BE
That’s on coal
BE
Here’s the working.
BE
Well positioned for long-term strength in seaborne thermal coal – Our analysis in this
report indicates that the seaborne thermal coal market is likely to remain tight for years
due to a combination of strong demand growth in emerging economies (mostly China
and India) and slow supply growth from coal-rich regions of the world.
report indicates that the seaborne thermal coal market is likely to remain tight for years
due to a combination of strong demand growth in emerging economies (mostly China
and India) and slow supply growth from coal-rich regions of the world.
BE
We also
conclude from our analysis that Xstrata’s equity valuation does not fully reflect the
potentially sustainable strength of this market. It is our view that we may be entering a
seaborne thermal coal supercycle for low-cost producers such as Xstrata as the
marginal cost of production is likely to continue to rise from the current level, which
itself has rebased higher in recent years. On our estimates, Xstrata’s coal business
accounts for at least one-third of Xstrata’s total NPV. And while near-term earnings
downgrades (we are cutting our Xstrata earnings estimates by 21% for 2010, 10%
for 2011, and 9% for 2012 and lowering our target price from 1900p to 1700p),
market concerns about the Glencore/Xstrata relationship and potential volatility in
commodity prices due to inventory restocking/destocking cycles may prove to be
headwinds to Xstrata’s share price for now, we recommend that value investors buy
Xstrata shares, especially after the company reports 1H10 results on 3 August 2010.
Xstrata continues to be one of our top picks in European mining.
conclude from our analysis that Xstrata’s equity valuation does not fully reflect the
potentially sustainable strength of this market. It is our view that we may be entering a
seaborne thermal coal supercycle for low-cost producers such as Xstrata as the
marginal cost of production is likely to continue to rise from the current level, which
itself has rebased higher in recent years. On our estimates, Xstrata’s coal business
accounts for at least one-third of Xstrata’s total NPV. And while near-term earnings
downgrades (we are cutting our Xstrata earnings estimates by 21% for 2010, 10%
for 2011, and 9% for 2012 and lowering our target price from 1900p to 1700p),
market concerns about the Glencore/Xstrata relationship and potential volatility in
commodity prices due to inventory restocking/destocking cycles may prove to be
headwinds to Xstrata’s share price for now, we recommend that value investors buy
Xstrata shares, especially after the company reports 1H10 results on 3 August 2010.
Xstrata continues to be one of our top picks in European mining.
BE
Earnings downgrades – We are lowering our 2010-12 Xstrata earnings estimates for
the following reasons: 1) more conservative volumes and higher cost assumptions, 2)
lower realized coal prices as we are now assuming a 6-month lag before Xstrata realizes
the benefit of higher prices, as per recent company guidance, and 3) the negative
impact of provisional pricing in zinc in 2010 as the zinc price has fallen 30% YTD. As a
result of these changes, which have led to a 16% decline to our NPV estimate for
Xstrata shares, we are also lowering our Xstrata target price.
the following reasons: 1) more conservative volumes and higher cost assumptions, 2)
lower realized coal prices as we are now assuming a 6-month lag before Xstrata realizes
the benefit of higher prices, as per recent company guidance, and 3) the negative
impact of provisional pricing in zinc in 2010 as the zinc price has fallen 30% YTD. As a
result of these changes, which have led to a 16% decline to our NPV estimate for
Xstrata shares, we are also lowering our Xstrata target price.
BE
Compelling value – On our estimates, Xstrata trades at a 2011 P/E of 4.9x, a 2011
EV/EBITDA of 3.0x, and a 25% discount to its new, base case NPV, which excludes the
value of unapproved growth projects. Xstrata screens as one of the cheapest shares in
our European mining coverage and continues to be one of our top sector picks.
EV/EBITDA of 3.0x, and a 25% discount to its new, base case NPV, which excludes the
value of unapproved growth projects. Xstrata screens as one of the cheapest shares in
our European mining coverage and continues to be one of our top sector picks.
BE
Taxloss – it was suggested that Gillard will be happy to say vague things and string on the mining execs in an attempt to keep them happy
BE
Until the election, after which she’ll do precisely what she wants.
BE
As a man on the ground, does that sound credible?
12:02PM
BE
Ok – we’re through midday.
IK
whoo hoo
BE
And I had said we’d end this on time, reflecting in part the lack of newsflow.
IK
indeed – my email appears to be broken
BE
Very quiet out there today.
BE
No raw to speak of. Which is why that BP “rumour” at the top went around the email round robins like a bush-fire as soon as we put it up.
IK
Recovery for the most of the news desk
BE
Ah yes – we had leaving drinks yesterday.
BE
For Gillian, who’s off to America
BE
And CBH, the markets editor, who’s off to HSBC.
BE
And it was at a Toxic Taverns pub.
BE
Which has triggered this move
Punch Taverns PLC (PUB:LSE): Last: 64.25, down 2.25 (-3.38%), High: 66.25, Low: 63.90, Volume: 560.56k
IK
Neil was errr not to happy about the location
BE
Outlaw – Punch is indeed core to the Muppet Alpha portfolio
BE
Which doubled down on BP a couple of days ago, at Neil’s insistence, so is having a temporary and exceptional period of benchmark underperformance.
BE
Down 2.8% cash weighted.
BE
BP accounts for three-quarters of the loss.
BE
So anyhoo
BE
Let’s tie up loose ends.
BE
(Arnold: who wrote that? wasn’t me.)
BE
Meant to mention ITV
BE
2010 forecasts raised: With ITV’s advertising trend still
buoyant and the strength likely, in our view, to be
sustained through Q4, we raise our 2010 ITV advertising
forecast from 7.9% to 10.3% and eps by 16% to 4.0p .
buoyant and the strength likely, in our view, to be
sustained through Q4, we raise our 2010 ITV advertising
forecast from 7.9% to 10.3% and eps by 16% to 4.0p .
BE
2011 lowered: A combination of factors persuade us to
reduce our 2011 revenue forecasts: (i) a tougher UK
consumer environment (ii) ITV still operating under the
deflationary CRR with SOCI down 5% ytd (iii) tough
comparatives from March 2011 (iv) lower government
(CoI) advertising spend (v) and a weaker schedule (no
World Cup, limited X Factor). We combine this with
higher costs as new management spends more on the
schedule than expected. We now look for zero
advertising growth in 2011 and 3.3% underlying cost
growth. Our eps forecast is reduced by 11% to 5.04p.
reduce our 2011 revenue forecasts: (i) a tougher UK
consumer environment (ii) ITV still operating under the
deflationary CRR with SOCI down 5% ytd (iii) tough
comparatives from March 2011 (iv) lower government
(CoI) advertising spend (v) and a weaker schedule (no
World Cup, limited X Factor). We combine this with
higher costs as new management spends more on the
schedule than expected. We now look for zero
advertising growth in 2011 and 3.3% underlying cost
growth. Our eps forecast is reduced by 11% to 5.04p.
BE
Forecasts suitably conservative – could be upside:
We feel happy that our forecasts are firmly based, ahead
of a tough economic year and new management’s
strategy. There could yet be left field upside. The new
Culture secretary Jeremy Hunt says CRR “is an
example of micro-regulation that we can do without.”
Abolition could enhance ITV eps in the first full year by
13-15%. An acquisition by ITV (Five is believed to be for
sale) could enhance eps by a similar scale, we estimate.
We feel happy that our forecasts are firmly based, ahead
of a tough economic year and new management’s
strategy. There could yet be left field upside. The new
Culture secretary Jeremy Hunt says CRR “is an
example of micro-regulation that we can do without.”
Abolition could enhance ITV eps in the first full year by
13-15%. An acquisition by ITV (Five is believed to be for
sale) could enhance eps by a similar scale, we estimate.
BE
Price target 66p – Now Equal-weight: Our stance has
been that we would move more defensive in H2. Lower
forecasts mean our DCF drops to 66p, at which level ITV
would trade on 13x 2011e eps – the upper end of our
‘suitable range’ of 10-13x mid-cycle eps. We move to
Equal-weight and favour ProSieben in the broadcasters
and Informa/Reed in the UK.
been that we would move more defensive in H2. Lower
forecasts mean our DCF drops to 66p, at which level ITV
would trade on 13x 2011e eps – the upper end of our
‘suitable range’ of 10-13x mid-cycle eps. We move to
Equal-weight and favour ProSieben in the broadcasters
and Informa/Reed in the UK.
BE
(Arnold: I don’t have arch nemesises. Neil, meanwhile, hates everyone. We’re good-cop bad-cop.)
BE
Sorry- the above ITV comment was from Morgan Stanley.
ITV Plc (ITV:LSE): Last: 53.90, down 1.4 (-2.53%), High: 55.50, Low: 53.60, Volume: 8.60m
BE
Taxloss: please control your Australian tendencies.
BE
And Encore Oil fans, I dunno. I’ll ask. Note shares are unmoved and barely traded. If there’s anything to say we’ll say it on Monday, if not before.
BE
Right – so Iz is bored and looking at pap shots on the Daily Mail website.
BE
So let’s close this.
BE
Thanks for all your comments, both today and this week.
BE
Hope the Irish drinks go well tonight.
BE
Good luck England/Germany {DELETE AS APPLICABLE} on Sunday.
BE
And have a good weekend, all.
IK
Bye all